Not 100% ready to retire? ‘Try before you buy’ with a “transition to retirement” strategy
Under the superannuation rules, there is scope to access some of your retirement savings in your super fund under an arrangement called “transition to retirement” (TTR). Under this arrangement, a super fund member can ease into retirement by reducing their working hours without reducing their income.
If you are aged between your relevant “preservation age” (see below) but are still younger than age 65, you are generally permitted to withdraw some of your super money each financial year and place it in an account that gives you regular payments, called an “income stream”, to supplement your other income (such as from part-time work).
Preservation age depends on when you were born, and ranges from age 55 if you were born before July 1960, increasing by a year until reaching age 60 if you were born after July 1964.
A TTR income stream allows you access to some superannuation benefits without having to retire or leave your job completely. This of course depends on your personal circumstances. Under this arrangement you are still be able to “draw down” regular payments from your super fund, however these payments are “noncommutable”, which means it cannot be withdrawn as a lump sum.
A self-managed superannuation fund (SMSF) can pay a TTR income stream provided its trust deed allows it. Also, once such an income stream is commenced, the proportion of fund assets that support the income stream attracts no tax.
The super law provides that for an SMSF, TTR income streams must satisfy the following requirements:
- it must be an “account-based” income stream, which means an account balance must be attributable to the recipient of the income stream
- the payment of a minimum annual amount must be at least 4% of the account balance
- total payments made in a financial year must be no more than 10% of the account balance at the start of each year; this is the maximum amount of income stream benefits that can be drawn down each year
- the income stream is non-commutable
- the income stream can be transferred only on the death of the member to one of their dependants, or cashed as a lump sum to a dependant or the member’s estate, and
- the capital value of the income stream and the income from it cannot be used as security for borrowing.
Note also that TTR plans are not available to members of defined benefit super funds.
Other issues for consideration under a TTR plan include:
Work and pension — If you are receiving a TTR income stream and are continuing to work, your fund (SMSFs included) may also be receiving contributions such as superannuation guarantee payments on your behalf. There must be two accounts to make this arrangement work – one for paying the TTR and the other for receiving contributions.
Allowing a lump sum — While no lump sum payments are allowed while receiving a TTR income stream (as it is noncommutable), once a member decides to retire or turns age 65, the income stream converts to a normal account-based
pension and the member can then take out a lump sum as required.
Pension changes tax take — Once a TTR has been started, the income from that portion of the super fund’s balance generally attracts no tax. With an SMSF, for example, if there are two or more members of the SMSF and only one has taken a pension (that is, the other members are still in accumulation phase), then only the portion of the fund’s assets that is attributable to the pension-drawing member escapes paying tax.
Check your insurance cover — If you have arranged to have life insurance cover through your superannuation fund, check with the fund to make sure your life cover does not reduce or even cease.
Please contact TNR for help regarding any of the above matters.